Pricing in a downturn: helping clients through the crisis
Agreeing to any client requests for fee reductions during tough economic times can have a seriously debilitating effect on the long-term viability of a law firm and such actions should not be taken lightly, writes Colin Jasper.
What the research says…
During the past month, I’ve read three pieces of research – relevant to law firm pricing at this point in time – that tell an interesting story when looked at together:
- Winners and losers – the first was research showing that top-performing companies from 2007-2017 outperformed competitors by 14 per cent during the downturn related to the global financial crisis (2007-2009), by 16 per cent during the recovery period (2010-2013) and by less than 1 per cent during the growth in the economy (2013-17). This suggests that it is the actions taken in the near-term that will have the greatest impact on who wins and loses during the next decade1.
- Client behaviour – the second was research among major buyers of legal services on how they are dealing with COVID-19. Just under half of the respondents (47 per cent) indicated they were renegotiating agreements with firms and asking for additional discounts2.
- Firm responses – the third was research among managing partners at leading US law firms indicating that more than 30 per cent would definitely or likely offer additional rate discounts in response to COVID-193.
Is this the best way to help clients? Is this the best strategy for firms?
The impact on clients, partners and financials …
We shouldn’t be surprised that many clients are asking for discounts at this time. Many businesses are struggling and are looking for ways to reduce their costs.
Procurement professionals see the opportunity to put pressure on existing suppliers. The easy response from firms is to acquiesce to these requests, not only to silence clients, but also due to concerns from some partners who find it difficult to respond to these ‘requests’ for fee reductions. The stated justification is to try to maintain utilisation.
In many firms, too few partners understand the impact of pricing on profitability. It therefore becomes easy to ‘give away’ 10 per cent of the fee via a discount or a write-off in order to retain the remaining 90 per cent of revenue. However, for a firm operating on a 40 per cent margin, a 10 per cent discount (either through write-offs, discounts or a failure to increase rates) equates to a decrease in profit – and therefore partner remuneration – of 25 per cent. And when prices and utilisation both decline, financial performance is squeezed from both ends.
If we discount our rates, it is hard to push them back up. We need to protect our profitability not only during this period but also beyond it. We need to avoid making expedient decisions we live to regret.
The impact on the client relationship …
But I think there is an even more important issue than the immediate financial impact. How do you want to be viewed by your client, once this stressful period has passed? What do you want them to remember about the way you handled the situation?
Firms’ responses can be viewed in one of three ways:
1. Compliant – compliant firms will agree to what the client asks for. While often thinking this will strengthen the relationship, it generally leaves client wondering if they should have asked for more.
2. Dismissive – an alternative responsive is simply to say no; to dismiss the request and offer no support. This sends a clear message that the client relationship is not really valued.
3. Engaged – the final alternative requires greater effort and involves engaging with the client. There is a common misconception that all pricing power has moved to the client. This simply isn’t true. All prices are an agreement between buyer and seller and always will be. And while it’s the client’s role to fight for a price that is fair to them, it’s our role to fight for a price that is fair for us.
How to engage with clients…
Firstly, we need to demonstrate we have empathy for the client and that we care. We should ask questions about their business, and about them personally to fully understand the pressures they are under. Secondly, we need to help them understand the constraints we have. For most full-service firms, while some practices are quiet, others are busier than ever before. Ultimately, rates are a method of rationing the firm’s finite resources and it would be inappropriate for the firm to sell these finite resources as a rate well below what they could be sold for to other clients.
Having done the above we can work with them to find a solution that works for both parties. The aim should be to support our clients, while protecting our rates. This may include helping clients understand where not to spend their money. Which matters can we stop, reduce or put on hold. Helping to quantify new business risks that justify investment now. Offering greater cost certainty on matters and formalising payment terms based on cash positions of the client and the firm. In doing so, we aim to strengthen client relationships (rather than behaving in a subservient or dismissive manner), with the goal of sustaining and growing our share of wallet practice post-pandemic.
The bottom line? Surely we can respond better than 30 per cent of managing partners at leading US law firms.
Colin Jasper is the Principal of Positive Pricing, a consultancy which is dedicated to helping professional services firms create greater value for their clients and capture a fair share of that value for themselves. Colin has consulted to professional services firms for almost 20 years. In this time, he has had the opportunity to work with many of the leading firms in the US, the UK and throughout Asia.
1 McKinsey & Company; Rev up your growth engine: Lessons from through-cycle outperformers. May 2020
2 Buying Legal Council; Question of the Week. June 2020
3 Altman Weil; 2020 Law Firms in Transition Survey – Recession Responses; May 2020